Bank of England hikes 2015 forecast as outlook brightens

The Bank of England (BoE) hiked its 2015 growth forecast on Wednesday and said that the British economy was heading back towards normal as the recovery picks up speed.

AFP| Updated: May 14, 2014, 21:23 PM IST

London: The Bank of England (BoE) hiked its 2015 growth forecast on Wednesday and said that the British economy was heading "back towards normal" as the recovery picks up speed.

Gross domestic product (GDP) was set to grow by 2.9 percent next year, upgraded from the previous estimate of 2.7 percent, the central bank said in a statement.

The economy was expected to expand by 3.4 percent in 2014, and by 2.8 percent in 2016, but both figures were unchanged from the prior forecasts given in February.

"The UK economy continues to perform strongly ... The economy has started to head back towards normal," BoE governor Mark Carney told reporters at a press conference, presenting the bank`s latest outlook.

The BoE also forecast that annual inflation would remain close to its government-set 2.0-percent target over the next two to three years.

Carney added that policymakers anticipated that the economy would move from a recovery supported by household spending, to an expansion that was sustained by business investment.The BoE meanwhile sharply revised down its expectations on unemployment, predicting that the jobless rate would fall to 5.9 percent in two years.

Official data published earlier on Wednesday showed that the key unemployment rate dipped to a five-year low point of 6.8 percent in the January-March period, from 6.9 percent in the three months to February.

"As time has moved on and the recovery has been sustained, the economy has edged closer to the point at which bank rate will need gradually to rise," Carney noted on Wednesday.

"The exact timing will inevitably be the subject of considerable speculation and interest," he said, adding that the answer would depend on the progress of the economy and in particular the measure of "slack" or spare capacity.

The Bank of England has kept its key lending rate at a record-low 0.50 percent for more than five years, since March 2009, in order to stimulate economic growth.

"Amidst the excitement, output is close to regaining its pre-crisis level. We should not forget that the economy has only just begun to head back toward normal," Carney added.

"Securing the recovery is like making it through the qualifying rounds of the World Cup. That is an achievement, not the ultimate goal.

"The real tournament is just beginning and its prize is a strong, sustained and balanced growth."

The economy picked up speed in the first quarter of 2014 with growth of 0.8 percent. It has now expanded for five successive quarters despite worries about the impact of state austerity measures.Analysts said the latest BoE forecasts would stoke expectations that interest rates could increase before Britain`s next general election due in May 2015.

"The details to date indicate confirmation of what the markets are currently expecting -- that is that the first rate increase will occur in the first quarter of 2015, probably February," said analyst Derek Halpenny at Bank of Tokyo Mitsubishi UFJ in London.

The BoE had pledged last year not to consider a rate rise until unemployment fell to at least 7.0 percent, but was forced to adjust its guidance after the jobless rate fell far faster than anticipated. 

Bank policymakers must now determine whether all the spare capacity in the economy has been absorbed before considering hiking rates.